Many people confuse the home appraisal with the home inspection with the assessment that the State provides for property tax purposes. They are three different and distinct processes for three different and distinct purposes.

• The home appraisal is ordered by the bank or mortgage company to ascertain the value of the real estate for the purpose of providing a mortgage.
• The home inspection is ordered by the home buyer to inspect the house for physical defects as well as electrical, plumbing and structural issues that may need to be repaired or replaced.
• The tax assessment is something carried out by the State on behalf of the County to determine the worth of the property for tax purposes.  This typically takes place once every three years and can be appealed.

Most people like high appraisals and low assessments.  If you’ve been living in your house long enough, you’ve seen your tax bill go up and down depending on when the assessor drove by your house (he or she will never go inside your home).

Appraisals

Effective May 1, 2009 a new system was put in place to give appraisers independence to go out to a home and ascertain the value free from any coercion or “encouragement” from the lender to reach a certain value.

Back during the real estate frenzy days of rapidly appreciating home prices, many appraisers felt pressured to submit their report to mortgage companies and banks so they would reflect inflated contract prices. Since there were so many exotic loan products and virtually anyone who could fog a mirror could get a mortgage, the only thing standing in the way of the home buyer being able to get to settlement was the appraisal.

Even in those days, when home buyers were willing to pay cash above the appraised value of the home, appraisers were feeling the heat to come in at the inflated values because, the higher the loan, the higher the fees for the lender.

The Home Valuation Code of Conduct

So Congress stepped in (where was the Tea Party when you needed them!).  They created something called the Home Valuation Code of Conduct.

In a nutshell:

REALTORS® and mortgage brokers are prohibited from selecting appraisers. Lenders are may use “in house” staff appraisers to conduct appraisals. However, the loan production staff is prohibited from:

• selecting, retaining, recommending, or influencing the selection of an appraiser; and,
• conducting any substantive conversation with an appraiser or appraisal management company regarding the appraisal assignment.

For the consumer, the appraisal process has remained largely intact. However, consumers may find the process takes longer than and may be more costly than it has been in the past.

source: Realtor.org

The idea was to create a system where there was an arms length relationship between the lenders and the appraisers.  The lender will still order the appraisal but they do it through a third party.  They don’t really know which appraiser will be assigned to any particular property.  It could be an appraiser that lives 5 miles away and knows the market area like the back of his hand.  It could be an appraiser from 100 miles away who just happened to be on the list and also just happened to have the lowest fee to the bank.

The bank then charges the home buyer and will provide a copy of the appraisal to the home buyer at some point in the process. Depending on the lender, they may provide the report right away or they may wait until after settlement and provide it only if the home buyer asks for it.

Valuation

The bottom line is that the appraiser is still under pressure from lenders.

Only this time is is to reach the lowest value possible.  This is good for lenders because it reduces the risk of declining home values.  It is good for the home buyer because it will mean a lower price than the contract price if the appraisal comes in lower than the contract price.  It is bad for the home seller because a low appraisal lowers the value and asking price for his home.  It is also bad for the neighborhood since this tends to be a vicious circle of every declining home values.

Foreclosures and short sales do not help.

Even if the home seller has equity in their home and has the ability to sell it, the foreclosures and short sales depress prices for the neighborhood.  Appraisers need to take this into account when they come up with the value of any individual home. Thus, home sellers who had been thinking they would have a nice little nest egg for retirement have less of a nest egg and, sometimes, no nest egg at all.

Appraiser Independence

The bottom line is that home buyers should be reasonably comfortable with the fact that the appraised value of the home is pretty darn close to the real truth. The days when an appraiser could be bought off with sports tickets or whatever or being threatened to being blackballed are gone.  By and large, appraisers approach home valuation they way they’ve been trained and, subsequently licensed.

It’s not just a guess.